Question

Suppose that gasoline prices increase dramatically this month. Lola commutes 100 miles to work each weekday. Over the next few months, Lola drives less on the weekends to try to save money. Within the year, she sells her home and purchases one only 10 miles from her place of employment. These examples illustrate the importance of a) the availability of substitutes in determining the price elasticity of demand. b) a necessity versus a luxury in determining the price elasticity of demand. c) the definition of a market in determining the price elasticity of demand. d) the time horizon in determining the price elasticity of demand.

Answer 1

Answer:

The correct answer is option d.

Explanation:

Gasoline prices increase dramatically in a month. Lola commutes 100 miles to work each weekday.  

For a few months, she tries to reduce expenses on gasoline but driving less on weekends. Within a year she moved to place only 10 miles away from her workplace.  

We see that in response to an increase in the price of Gasoline, the quantity demanded of gasoline by Lola is adjusting over time. The demand is getting more price elastic with the passage of time as a consumer is adjusting to price change and finding new ways to reduce expenses.  

This example shows how the time horizon determines the price elasticity of demand.